Environmental governance strategies in a two-echelon supply chain with tax and subsidy interactions

Yongjian LI*, Qianzhou DENG, Chi ZHOU, Lipan FENG

*Corresponding author for this work

Research output: Journal PublicationsJournal Article (refereed)peer-review

40 Citations (Scopus)


Environmental impact is one of the major causes of tax and subsidy interactions between the government and firms. The government sets the tax of the upstream impact and designs the subsidy threshold value to promote the green effort of firms. This paper presents the optimal decision of the supply chain and the effective environmental governance strategy of the government. A Stackelberg game between the government and a two-echelon supply chain is constructed, where a supplier makes core parts for a manufacturer. First, we compared the effects of subsidy on the pricing decisions of firms and identified the profitable condition of the green effort of manufacturers. Results corroborate that a negotiated space for suppliers and manufacturers exists to reduce the environmental impact from the source, especially when the tax legislation is strict. Second, we obtained the optimal upstream contract of environmental impact in supply chains, which appears a phenomenon of the Matthew effect under any type of governance strategies. This finding affirms that subsidies make supply chains inclined to choose a greener upstream decision. The condition when subsidies make sense by effective environment improvement in the supply phase was further derived. Finally, with tax and subsidy governance strategies, the multi-perspective social welfare was simulated and analyzed. Accordingly, we verified that the growth boundary of the supply-chain profit with high subsidy threshold is better than that of the social welfare or the environment performance. It implies that setting the green subsidy standard originally high is a comprehensively sustainable choice for social welfare. In addition, the simulations of three tax structures were analyzed in extensions.

Original languageEnglish
Pages (from-to)439-462
Number of pages24
JournalAnnals of Operations Research
Issue number1
Early online date26 Jul 2018
Publication statusPublished - Jul 2020
Externally publishedYes

Bibliographical note

We acknowledge the support of (i) National Natural Science Foundation of China (NSFC), Research Fund Nos. 71372100 and 71725004 for Y.J. Li; and (ii) National Natural Science Foundation of China (NSFC), Research Fund No. 71702129 for C. Zhou.


  • Environmental impact
  • Governance strategy
  • Stackelberg game
  • Supply chain management
  • Tax and subsidy

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